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MARKET ACCESS ADVISORY
Redirecting a China Strategy
A global entertainment company ran into trouble with its local partner in China. The company believed that its profitable and promising media channel in a major Chinese city was being strong-armed by local companies bent on becoming the company's "new partner."
The global entertainment company had invested in a local Chinese entity alongside a private equity fund specializing in China investing. One year into the project, the local partners were demanding additional investment and a renegotiation of the terms of the deal. The global entertainment company wanted to know if this investment could be salvaged and if other investments in China were possible.
We immediately launched inquiries through our friends in the industry and government and found there were grave misunderstandings on all sides. While we were determining what had gone wrong, the private equity firm abruptly pulled out of the venture and lost $1 million in the process.
As we pursued the issue on behalf of the entertainment company, we found that it had made a number of mistakes.
- The entertainment company's representatives had negotiated with a general manager in one of the country's large, state-owned media operators, not knowing the individual's full name. The representatives accepted the general manager's interpretation of existing laws and regulations, which turned out to be inaccurate. The private equity firm appeared not to have conducted comprehensive due diligence regarding the players or the regulations.
- The equity firm failed to secure a valid local partner, one with whom it had built trust and confidence.
- Relevant regulatory agencies were not consulted, nor were the trade ministry, the Chinese Association of Enterprises with Foreign Investment, nor any other of the government agencies dedicated to guiding, directing and protecting foreign investment. Moreover, our client did not create relationships with its regulators nor its natural allies and friends.
While the international investors believed they were being strong-armed, the local partners did not. After the private equity firm abruptly withdrew from the market, the local partner was unhappy at the loss of its investment and with private equity firm. The local partner knew everyone in the industry and was in a position to make sure the entertainment company did not do business in China again. We assisted the entertainment company in smoothing over relations with the former local partner. More importantly, we created a new strategy and moved the entertainment company into a new and different regional market. There we knew the local players and rules and could make the entertainment company feel more comfortable. We then helped the company create a network of relationships, meet regulators, and most important, connect with the Chinese agencies concerned with promoting investment and supporting foreign companies.
During the redirection process, we identified several potential opportunities with provincial partners in prosperous, business-friendly areas. These areas had not been deluged with foreign investment and companies and were eager to partner with a world-class enterprise. We worked closely with friends in the provincial governments to help them understand the entertainment company's perspective, expertise, accomplishments in other markets, and value as a business partner. This, in turn, paved the way for creation of a framework that enabled our client to move forward.